Digital marketing is the process of using digital technologies to market goods, services and brands. Digital marketing professionals charge for their time and expertise, with a markup on acquired products and services. But what happens when you grow your business from a consultancy to an agency, things get more complicated quickly and you’re going to question what the right model is for your digital marketing agency.
In the UK there’s something like 250,000 marketing agencies. You can be assured that the majority of them heavily offer digital marketing services over traditional marketing activities. They’re not all going to use the same model though. We all do things a bit differently.
Until the late 1980s, most marketing agencies charged a percentage of the media they sold or a markup. It was generally accepted that this fee would be in the region of 15%. But times have changed and the way marketing agencies – and especially digital marketing agencies – price things, is determined in a number of different ways.
GrowTraffic evolved from a freelance SEO consultancy and our model has roots in that past. Originally, it was just me and I ran it very lean. I didn’t even pay for SEO software for a long time. I used all the free software I could and back then there were more opportunities to use desktop-based software, which crawled Google’s results from your own computer. So it was mainly just my time that I charged for. That was super simple to keep on top of.
After a while, I started working with a couple of other freelancer SEO consultants, mainly because I always needed help with link building. I also worked with a few freelance web designers who would build the websites GrowTraffic built over the years. This brought with it more complexity, but it was fairly easy to work out how much I could get away with marking up the costs of the freelancers I worked with.
The thing about freelancers is they are notoriously flakey. They are always great, to begin with, but after a while, they end up ghosting you. They either get too busy with their own stuff, stop freelancing or get themselves a better job. The other thing about working with freelancers is you can’t make the same amount of money from a freelancer that you can if you were to do the work yourself, or if you were to pay an employee to do the work yourself. The main advantage is you only have to pay them for the hours they work or the output they do.
I’ve worked in a few agencies over the years and in every agency I’ve worked in, the focus was always on saying yes to something that needs doing and then figuring out how to do it with the agency staff. There was never a question in those roles that anything would be outsourced unless it couldn’t be done by the agency staff.
When Rachel joined GrowTraffic we continued working in this manner, I eventually reduced my time with the clients and we brought more freelancers in again. Having a resource in place taught me early on the advantage of having someone actively in the agency. There are a number of advantages, as well as quite a few disadvantages of having employees.
Of course, there are those who would tell you to outsource everything. There is some merit in this argument of course. If you get a good bank of freelancers you can rely on, you can field things out to any number of people and just keep an eye on the quality of the output yourself. It takes a bit of managing and you always need to be looking for new freelancers because you’ll always have a churn of freelancers.
It’s really a question of what you want from a digital marketing agency in the first place. What your vision is and how you like to do things.
Personally, for me, it’s never really been about money but more about control, positioning myself and a sense of being. Money is important and there we’ve all got to earn a living, but if it was all about money, I would have stayed as a freelance SEO consultant, because believe me, it’s easier to make money that way than building a digital marketing agency, which has more fixed overheads and more hungry mouths to feed. But you get to the point where you realise it’s just not that much fun when it’s just on you and I’ve always been a bit of an empire builder.
Building an agency offers an opportunity to grow a business that can potentially self-sustain itself and grow an income that would be virtually impossible as a freelancer. I remember in 2012, I worked out with my then business partner how much we could realistically earn from running our freelance SEO consultancy and it consistently came out around the figure we could earn in a middle-level marketing management role. At the time the effort didn’t seem worth that kind of payoff.
If you have employees you need to think about how you’re going to structure your digital marketing agency. The old model had various layers of management seniority, think account execs, account managers, account directors. You’ll also have specialists that do various different tasks. Modern agencies tend to be much flatter in structure. The type of organisational structure you implement can also have an impact on the pricing model you choose.
But what are the different models you can employ in your digital marketing agency?
Before you do anything, you’ve got to be hot on the possibility that you’re working for free too much. Every digital marketing consultant and digital marketing agency will find that they’re doing too much free work from time to time. In some way, you need to be charging for everything you do.
The amount that you need to charge your clients is going to be based on various factors, such as things like office rents, management salaries, sales and marketing cost, billable time for each role and ultimately the margin you want to achieve.
In every marketing agency I’ve worked in, time was the primary thing that we charged. When I started getting GrowTraffic clients I billed out at £60 an hour, but this price was based on the amount the agency I worked for at the time had and had little science to do with it. We were still charging £60 an hour when Rachel started working for the business on a full-time basis five years later. This rate was reduced slightly over time as we focused on developing a local client base and as we explored discounting for a couple of years. We’re now working on an hourly rate of £75, which does have some science to it, but which is also commensurate with the rate of inflation meaning in real terms we’re charging roughly what we were charging in 2010.
Working out the amount of time you think a task will take and multiplying it by an hourly rate isn’t the only way to look at this type of thing.
Being able to really accurately understand the time it takes to undertake various tasks is essential to the running of your digital marketing agency. Over time you’re going to need to reassess the tasks your team carries out frequently, to determine if your pricing still makes sense. My advice is don’t base it on how long it takes you to do something, base it on the average time your team takes to do something, then add a bit for spooling in and spooling out time.
Here are some pricing models you can employ in your digital marketing agency:
Blended Rates Pricing
Blended rate pricing is what we use here at GrowTraffic, whether you’re working with one of our new starters or whether you’re working with me, you’re going to pay £75 an hour. We find this to be a great way to simplify the pricing process and generally our clients prefer this way of working because they know what they’re going to pay.
Specialist Rates Pricing
With this model, you give each of your employees a rate based on their experience and level of seniority. Digital marketing agencies have to spend more for senior digital marketing professionals so most clients understand that they might be expected to pay more for a more senior person to work on a project.
You can then negotiate with your clients how much of your organisation’s senior time they want to dedicate towards their projects. They’ll often be concerned about paying more for senior marketers, but you just need to explain why they’re paying more, they’re paying for someone who is more likely to get it right the first time around.
Fixed Fee Pricing
Fixed fees are most often seen when an agency tenders for jobs and agrees for a figure a business is able to spend on a project. This can be particularly challenging, especially when you’re carrying out a project with lots of moving parts because you can easily under charge and suffer from scope creep when unforeseen problems arise. On the flip side, fixed fees impact the relationship between the client and the digital marketing agency and can lead to the digital marketing agency massaging the figures or being less than transparent with the work they’ve carried out, especially if it was easier than anticipated.
Value-based pricing is based on the return on investment a client will potentially get from the strategy you put in place or the campaign you’re advising them on. Often this works well for organisations with a high return on investment. There has been a shift to this kind of pricing over the years. The problem with this kind of pricing model is marketing doesn’t always work the way you think it will and it’s you’ve charged an organisation a percentage of projected revenue but that revenue hasn’t been achieved then you can bet they won’t be returning to your digital marketing agency for you to have another stab at it. If you’re working with a big national or international player with higher ROI you might find this is the most lucrative pricing model but for most digital marketing agency clients, it probably won’t be the right option.
Pay On Results Pricing
Here at GrowTraffic we offer a form of Pay On Results pricing for some selected SEO clients. There are a number of different kinds of pay on results pricing models that you can employ. It’s a bit more straightforward in SEO because you can set the KPI either based on ranking or based on traffic. In other types of digital marketing you might be looking at sales, awareness, followers etc.
Monthly Recurring Revenue
If you want to build a digital marketing agency and you don’t want to constantly have sleepless nights, you want to focus on monthly recurring revenue (MRR) in the form of retainers. Blended rates and Specialist rates are the two models that work best for an MRR model.
Getting Your Estimating Right
Probably the most important thing you need to think about is estimating. This is something almost every digital marketing agency will struggle with from time to time. As I said earlier, it’s important to regularly review the times it’s taking your team to actually deliver the work in questions. This will change over time. Technology changes, generally making things faster, which can be a good thing, but new staff will also take longer to complete tasks and that’s something that you need to factor in.
It’s also important you factor in every single cost. It’s no good to just work out how long something will take, because there are more costs than time associated with most tasks, think software, think account management, think the cost of sale, think electricity, rent etc. This all needs to be factored into the amount you charge your client whilst making sure you make the right level of profit.